The mayor of a Disney company town pushes back, in vain, against a tax handout to Disneyland

By Michael HiltzikBusiness Columnist

July 12, 2016 2:08 PM PT

The Walt Disney Co., like other corporations that rank as their host towns’ biggest employers and taxpayers, often has a tendency to come off like the owner of a company town. That’s the case in Anaheim, the home of Disneyland, which hasn’t been known in recorded history to deny Disney much of anything.

Anaheim’s current mayor, Tom Tait, has been fighting hard to change that. His latest cause is an immense tax giveaway that will be the subject of a public hearing Tuesday night before the city council, and possibly a vote.

If Disney is going to build the hotel anyway, this incentive is more like a gift.

— Anaheim Mayor Tom Tait

The issue is a 20-year city room tax rebate that Tait’s colleagues on the council are preparing to grant to Disney and the developers of two other proposed luxury hotels in the Disneyland vicinity—“a bizarre giveaway program to the influential and powerful,” as Tait labeled it in an op-ed this weekend in the Orange County Register. The rebate would be 70% of the city’s transient occupancy tax, which is 15% of room charges. Over 20 years, the city estimates, it would be writing checks to Disney totaling $267 million. The total for the three projects would be about $550 million. [UPDATE: The city council approved the tax giveaway Tuesday, 3-1.]

Tait is convinced that these projects are destined to go ahead even without the rebate. That’s especially true of Disney’s project, a 700-room four-diamond luxury hotel slated to replace a parking lot just north of the Disneyland Hotel within the resort district. The expected room rate will be $450 a night, which is within the range of what you’d pay for a room in midtown Manhattan (at the Trump International Hotel, say).

“If Disney is going to build the hotel anyway,” Tait told me, “this incentive is more like a gift.”

Tait, who was first elected mayor in 2010, has made a habit of opposing corporate handouts by his city. He opposed a deal cut last year to immunize Disneyland from any city ticket tax for 30 years, in return for the company’s investing at least $1 billion in the park through 2024. There isn’t a city ticket tax, as it happens, thanks to a 20-year guarantee that was to have expired this year. Tait objected at the time that the deal was a three-decade hamstringing of voters who might someday want to raise revenue with a ticket levy. “Down the road, people will rue this day,” he said then. “Other people will look at us and say that we gave away the people’s right to vote.”

His point now is that the city can’t afford to give up more to Disney and other hotel operators than it already does. “This will have a devastating financial effect on our city,” he says, “which means a devastating effect on our city services.” Anaheim’s annual budget runs to $300 million. Of that, Tait said in his op-ed, the city spends $90 million a year “in the resort district to support Disney and the other resort businesses.” All that means less money, not more, to “address funding public safety, providing transportation for seniors, creating transitional housing for working mothers, or creating after school programs for at-risk youth.”

The proposal we are bringing before the city council will not be built without this incentive.

— Disneyland spokeswoman Lisa Haines

Tait’s argument parallels those made by other critics of tax incentive programs, which include programs aimed at goosing real estate development and the film industry: There’s almost never any evidence that they yield a profit to the taxpayer and considerable evidence that they don’t. The recipients always assert that the handout is the key to their decision-making, but they would have to say that, wouldn’t they, or they wouldn’t get the money. Typically, the cost of the incentive more than offsets any gains from increased economic activity, or the money just ends up incentivizing a business to move from one town to the next one over to exploit a tax deal, or goes to projects that would happen anyway.

Disney calls its project a “new flagship hotel” and estimates it would “create thousands of jobs and benefit Anaheim with more than $750 million in additional tax revenue over the next four decades, while helping the city reach its stated goal of attracting more high-end visitors.”

But it says the rebate is an absolutely crucial factor in its hotel plans. “The proposal we are bringing before the city council,” Disneyland spokeswoman Lisa Haines told me, “will not be built without this incentive.”

It would be presumptuous to say Disney is bluffing in Anaheim, but it behooves us to ask if its position is plausible. To begin with, the economy is smiling these days upon Disneyland and the luxury hotel sector.

The park is benefiting from a new investment of more than $1 billion, including the creation of a Star Wars-themed expansion, and if we know anything about Disney, we know it’s an expert at squeezing every investment until it screams for mercy. The spike in interest and excitement in the park has enabled the company to jack up ticket prices to as much as $119 on “peak” days.

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One great way to exploit a resort investment is through luxury room rates and food and beverage sales. Plainly, the company sees greater demand from high-end customers than can be filled through its existing four-diamond hotels, the Grand Californian and the Disneyland Hotel, and one has to ask how much it would be willing to leave on the table just because it’s been deprived of an additional 10.5% gimme (that’s 70% of the 15% room tax) on top of whatever the market allows it to charge for rooms.

The luxury hotel segment isn’t one that normally depends on tax incentives, according to Alan X. Reay, an expert in the California hotel market at Atlas Hospitality Group. Reay counts 102 four-diamond hotels in Southern California (four diamonds is AAA’s ranking for top-line hotels). Of those, only two were built with tax incentives: the JWMarriott and Ritz-Carlton at the L.A. Live district of Los Angeles. When they were launched in 2007, he says, it was hard to get developers to invest without a come-on.

Reay is skeptical that the same necessity exists for the new projects, especially Disney’s: “There no question that Disney would go ahead” even without the incentive, he says. It’s possible that Anaheim is giving too much away all at once by approving rebates for three luxury hotels at one stroke. Because there are so few comparable luxury hotels in the area, the city would be better advised to wait until it had a better idea of whether the luxury market really needed a tax rebate to grow.

“I see a good argument for an incentive to spur redevelopment in an area,” he says. But there’s no evidence that “Anaheim is losing business to other areas.”

Nor is it clear that Anaheim would do better with subsidized four-diamond hotels than with unsubsidized lesser hotels. Tait raised that very point in his op-ed. “Proponents of the luxury hotel program,” he wrote, “claim that our city’s general fund is better off keeping only 10% of the tax from a four diamond hotel than it would be by receiving the taxes from a three diamond equivalent. Then somehow, through the magic of luxury hotels, by gifting hundreds of millions of taxpayer dollars to corporations that don’t need it, benefits will trickle down to residents, who ultimately will pay less in taxes.” He had a word for that: “This is a fantasy.”

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UPDATES:

7:15 a.m., July 13: This post has been updated with the result of the city council vote.